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Activist Investor Carl Icahn on Genzyme Deal

August 31, 2011 | About:
Carl Icahn is famous for being an activist investor, where he buys a big stake in a corporation that enables him to influence the board. He has said, “I make all these billions because there are so many companies with problems that can be easily fixed.” So he is one kind of investor who involves himself in the decision making process of the company. He comes in and restructures/fixes the company's problems to drive its share price much higher.

Icahn has replied when being asked how he has done it: “It’s somewhat instinctive – like a top open-field runner and he’s running up the field and scores a touchdown. I don’t think you can ask him, “What was your procedure, and why’d you cut right or left out there?””

He has described when he came into the position of Genzyme, which already sold to Sanofi-Aventis (SNY) for $20 billion. The investment in Genzyme has contributed $300 million more into his net worth. He said the issue for the biotech firm is, “These companies usually have management that has overspent and not enough funds to complete what they started. There’s a suitor – big pharma – standing outside that can’t get in the door. We help push that door open.”

In Genzyme, there are several divisions which are worth pursuing and others are very bad. For example, the good side was its rare-disease drug division. There were therapies like Cerezyme to treat Gaucher’s disease which were cheap to make (around $3000 for a year’s worth) and the selling price is up to $300,000 for an annual dose, which is 100 times higher. And if patients didn’t use them, they will die. So the company is having a monopoly on that niche with huge profit margin of 95%. For the bad segments, there are non-core drugs, surgical and diagnostics products with no connection to rare-disease therapeutics. This bad segment contributed $2 billion in revenue but no profit at all.

Then one event happened at the beginning of 2009, when the FDA found the flaws in one of Genzyme’s factories and delayed a new drug. The share dropped more than 25% in less than a month. After going through the checklist of risks that Genzyme might encounter — such as how broken was the manufacturing? What if FDA prevents Genzyme for a long time in the future? How about the health care reform? etc. — he then judged whether the price he paid was worth the risk it assumed. He has discussed: “Genzyme went down for the wrong reasons, because of a manufacturing glitch which a lot of people were scared of for the near term. But for the long-term I believed there was little problem. Additionally, Genzyme had a great pipeline no one was giving value to.”

And Icahn has said to Termeer, the chairman, president and CEO of Genzyme for the last three decades: “You are the captain of the ship. If the ship goes down, you're the guy in charge. Don’t explain, just look at the stock.” Icahn recalled that he has foreseen the possibility of Genzyme being merged with a big pharma company.

Icahn kept loading up on Genzyme shares. When the issue of their manufacturing problems with the fine of FDA seemed to get worse, his position was around 4% of the total company. During that time, Sanofi-Aventis was looking for products that could fill in the revenue which is going to disappear when its drugs for cancer and blood pressure face generic competition. Even after the a hard time dealing with the blockage from Termeer, the deal finally closed, from the beginning offer of $69 a share to $74 a share. Genzyme's market value jumped up for $6.5 billion since Icahn got involved.

The Forbes article can be viewed in the following link:

Inside Icahn's Brain: How He Picks A Target And Pulls The Trigger

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


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